Last week, I looked at the i-Shares Lehman 20 plus Year Treasury Bond Fund (symbol: TLT), and I suggested “that TLT should be going sideways at best or break down altogether. “ My only caveat was that “my bond model still remains positive. The Vanguard Total Bond Market ETF (symbol: BND) is not showing signs of “technical” fatigue. As stated before, BND correlates more closely with the Dow Jones Composite Bond Index, which is utilized in the bond model’s construction.“
So here we are only 1 week from that report and BND has officially broken down. Figure 1 is a weekly chart of BND. The red and black dots over the price bars are key pivot points, which represent the best areas of buying (support) and selling (resistance). The pink labeled price bars are negative divergence bars, and in this case, this is a negative divergence between price, which has gone higher, and an indicator, which has gone lower, that measures the price action. The indicator in the lower panel counts the number of negative divergences occurring over a set time frame.
Figure 1. BND/ weekly
There are two features here that identify a double top in BND. First, last week’s close above and this week’s close below the key pivot at 83.93 is a sign of a double top. 83.93 was resistance that became support, but support did not hold and it is now resistance. Failed breakouts should not happen. Two, the clustering of negative divergence bars is a sign of slowing upside momentum. (Of note, this is seen across multiple assets, so the limited data is not a concern here.)
Putting it together, Treasury bonds should remain range bound at best or breakdown in the worse case scenario. With regards to BND, a new upward trend won’t start until the 83.93 level is taken out on a weekly closing basis. If that were to happen, I suspect the “breakout” would be rather dramatic owing to prolong period of consolidation. It should also be noted that my bond model remains positive. From a portfolio perspective, it is my expectation that I will be reducing one half of my position in Treasury bonds owing to the break down in the technical price structure.